European stock markets hit by Portuguese bank fears and debt crisis concerns

Concerns over Portugal’s largest bank send shares down across Europe. Fears over Espirito Santo International as the shares of the troubled bank suspended after tumble. Portugal’s bond yields jump. Analyst says “it’s not a new eurocrisis”…

 


Powered by Guardian.co.ukThis article titled “European stock markets hit by Portuguese bank fears — business live” was written by Graeme Wearden, for theguardian.com on Thursday 10th July 2014 15.23 UTC

As those of you who follow the stock markets will know, analysts and traders have been suggesting for weeks (if not months) that there could soon be a ‘correction’, after a long period of steady gains.

The problems in Portugal have acted like a catalyst.

As Chris Beauchamp, market analyst at IG put its:

With Portugal looking to be in trouble once again, prudent analysis has been thrown out of the window in preference to a knee-jerk reaction.

Portuguese bond yields aren’t soaring (yet), and the contagion hasn’t spread to Spain or Italy (yet), but the combination of the news from Lisbon and more data that confirms the weakness of the eurozone has provided the excuse to finally kick start the summer volatility trade into life.

Or, in fewer characters:

Golden Dawn spokesman imprisoned ahead of trial in Greece

Elsewhere in the eurozone…. Greek authorities have highlighted their determination to crack down on the neo-nazi Golden Dawn.

Magistrates demanded that the party’s spokesman Ilias Kasidiaris be imprisoned pending trial, as our correspondent Helena Smith reports:

Ilias Kasidiaris, for many the face of Golden Dawn, was led away to the special wing of Athens’ Korydallos prison after appearing before the two magistrates assigned to investigate the alleged illegal activities of the neo-nazi organization. His imprisonment, on charges of illegal weapons possession, brings to nine the number of Golden Dawn MPs now currently in prison pending trial on charges of running a criminal organization that masqueraded as a political group.

The step illuminates what many are describing as the renewed determination of the two female judges to close the Golden Dawn file before times runs out: the magistrates have 18 months to get the trial up, running and completed before they are forced to release the MPs again.

Kasidiaris, who ran for Athens mayor and garnered 16% of the vote in local elections in May, strongly denied that he had been in possession of illegal weapons, showing reporters the permits he had for two hunter shot guns he is accused of transforming into automatic weapons,

The MP’s lawyers, who said they would be appealing the decision, repeated that the politician’s incarceration was part of a political plot orchestrated by the government to eradicate a party that has shot from being a fringe group to the country’s third biggest political force.

But judicial authorities, who had privately regretted Kasidiarias being freed on bail when he was arrested for allegedly overseeing Golden Dawn’s paramilitary activities last year, appear in no mood to compromise this time round. The former commando, who is believed to have ambitions to lead the party, had spent the last nine months reorganizing and softening the group’s image – a move that has seen it go from strength to strength on the back of the country’s worst economic crisis in living memory. In May the newly revamped Golden Dawn succeeded in sending three MEPS to the European parliament.

Kasidiaris rose to fame slapping two leftwing female politicians on live TV back in 2012 – a shocking feat that at the peak of Greece’s economic crisis only saw the party’s popularity’s ratings rise.

Updated

Today’s selloff is a blow to anyone who took part in Banco Espirito Santo’s recent rights issue.

It raised funds by selling new shares at €0.65 each. Today’s 17% tumble sent them down to just €0.51 before trading was suspended.

Banco Espirito Santo’s problems come at a tricky time for the banking sector, points out Jasper Lawler of CMC Markets:

Banks in particular are under massive scrutiny with European banks being targeted by the US regulators while banks in the US and Europe face tougher capital requirements as part of bank stress tests.

With tougher capital requirements, it means banks need to keep more money in reserve and can’t lend it out and make returns. This problem is exacerbated in Europe where weak economies are not generating demand for banks loans in the first place.

It’s a vicious circle — the weak economic growth also makes it harder for companies to risk taking out more loans, especially if they don’t see strong demand.

We’re not free of World Cup analogies yet….

Here’s a good write-up of the Portuguese situation, from AP

Bank fears reignite Portugal market tensions

Worries over the health of one of Portugal’s largest financial groups hit the country’s stock market hard on Thursday and pushed up its borrowing rates.

The tensions are centered on the Espirito Santo group of companies, which includes Portugal’s largest bank Banco Espirito Santo.

Share trading in the bank was suspended after a precipitous fall of more than 16 percent, dragging the Lisbon stock exchange down more than 4% and pushing up the yield on Portugal’s benchmark 10-year bonds by 0.13 percentage points to 3.89 percent. Sentiment was knocked across Europe, and the Stoxx 50 index of leading European shares was down 1.4%.

The market moves provided an unwelcome reminder to investors of the tensions that gripped Europe for much of the past few years, when concerns over the state of the public finances in a number of countries that use the euro were at their most acute.
Portugal became the third eurozone country after Greece and Ireland to require a financial rescue when it got a €78bn ($106bn) bailout in 2011. In return, successive governments have had to enact tough austerity measures, such as cutting spending and reforming the economy.

Portugal’s efforts in recent years to get its public finances into shape have helped it regain the trust of investors. That was manifested in the fall in the interest rates the country pays on its borrowings. As a result, Portugal concluded its three-year international bailout program in May, with the government confident it can raise money in the markets.

The government insists Banco Espirito Santo is solid, but a parliamentary committee says it intends to call the finance minister and the governor of the Bank of Portugal to answer questions about the Espirito Santo group of companies.

Banco Espirito Santo is being engulfed by a cascade of bad news from other family group companies, and investors fear it is vulnerable. It is part of a banking dynasty dating back to the 19th century, and the Espirito Santo family is the bank’s largest shareholder with around 25 percent. The other shareholders include France’s Credit Agricole, Brazil’s Banco Bradesco and Portugal Telecom.

An audit requested by Portugal’s central bank in May found “serious” accounting irregularities at Luxembourg-based Espirito Santo International, an unlisted holding company whose board of directors included Ricardo Salgado, chief executive of Banco Espirito Santo.

Investors fear the holding company’s financial problems could contaminate other parts of the Espirito Santo group, including Rioforte, the group’s non-financial holding company which manages assets in tourism and private health care among other interests, as well as the bank.

Portuguese banks recorded heavy losses during Portugal’s bailout but passed the so-called “stress tests” demanded by the European Central Bank to assess whether they were sound.

Updated

Europe’s stock markets remain deep in the red too, led by Portugal’s PSI index

Many banking shares are down by 3% or 4%:

Dow Jones falls 1% at start of trading as Portuguese bank fears hit Wall Street

Wall Street has just opened, and the main share indices have promptly dropped as US investors react to the selloff in Europe.

The Dow Jones industrial average has dropped by almost 1%, losing 159 points to 16826.

And the tech-heavy Nasdaq index shed 1.5%, as Espirito Santo International’s problems hits markets on both side of the Atlantic.

There’s no suggestion that Banco Espirito Santo customers are panicking, by the way, despite concerns over the health of its parent company. This photo of a branch in Lisbon shows a definite absence of queues….

The Wall Street Journal has pulled together more analyst reaction to the situation at Espírito Santo International (ESI) after it suspended some bond repayments on certain short-term bonds yesterday, and the knock-on impact on Portuguese lender Banco Espirito Santo (BES).

Analysts at the Royal Bank of Canada highlighted that the problems relating to ESI could have a much wider impact on the country’s economy if they persist.

“While the aforementioned case is likely to be an isolated one it clearly highlights the problems of early bailout exits whilst the economy, the banking system and the public finances are still in a shaky state,” they wrote in a note.

Alberto Gallo, a credit strategist at the Royal Bank of Scotland said that although BES is not directly responsible for the repayment of any ESI bonds, it “is subjected to reputational risks given its link to the group.”

More here: European Markets Tumble on Portuguese Bank Woes

Updated

Here’s a useful chart explaining how Banco Espirito Santo fits into the Espirito Santo Group structure.

Shares on Wall Street are also expected to fall when trading begins in around 30 minutes:

Another reason not to panic too much — as Aurelija Augulyte of Nordea Markets points out, Portuguese government bond yields are still near their lowest point in four years:

Here’s an interesting chart – it shows how the cost of insuring Portuguese bank debt, using a credit default swap, has risen in the last month.

A CDS of 344 means that it costs €344,000 to insure €10m of bank debt for a year.

Megan Greene: Portugal won’t create new eurozone crisis on its own

So, do the problems in Portugal mean the eurozone crisis has reared back into life?

I don’t think so. We’ve not suddenly been transported to the mad days of 2011 and 2012 again.

Espírito Santo International’s problems are a reminder that southern Europe’s economy is fragile, and that undeclared problems are still lurking in the banking sector

But as analyst Megan Greene points out, Portugal simply isn’t big enough to derail the eurozone.

Concerns over Espírito Santo have also been building for a while. Last December, the Wall Street Journal flagged up that the company raised funds during 2011 by selling debt to its own investment fund.

The money was repaid, but the deal shows the potential clashes of interest that can arise with a major conglomerate.

Portuguese government debt has also fallen in value today, driving up the yield on its 10-year bonds to around 4%, from 3.8% yesterday. That’s a three-month high.

Updated

Background on the Portuguese selloff

The Portuguese worries flared up yesterday afternoon, when it emerged that conglomerate Espírito Santo International was looking to restructure some of its debt.

That sparked fears over the health of its businesses, triggering the 17% tumble in Banco Espirito Santo’s shares today.

European markets slide as euro fears return

European stock markets are in retreat today, with losses across the board sparked by fears over Portugal’s largest bank.

The main Portuguese stock market, the PSI 20, has tumbled by 4.5% so far today, driven down by their biggest bank, Banco Espirito Santo (BES).

Disappointingly weak manufacturing data from France, Italy and the Netherlands this morning (details here) has helped drive shares down, as investors worry that Europe’s recovery is faltering.

The main European markets have all been hit, pushing shares across the region to their lowest level in two months.

Greece’s underwhelming bond sale this morning has added to the jitters (and also suffered from them), wiping out the optimism created by the Federal Reserve last night.

Concern is growing in Lisbon that BIS will be hit by financial problems at its parent company — Espirito Santo Financial Group, which suspended trading in its own shares this morning.

And in the last few minutes, trading in BES has also been suspended after tumbling 17%.

As Jamie McGeever of Reuters shows, European banking shares have been falling for a while:

More details and reaction to follow….

Updated

Allie Renison, head of Europe and Trade Policy at the Institute of Directors, reckons we shouldn’t panic about Britain’s widening trade gap.

“While first impressions are indeed worrying, it should be pointed out that that the widening gap is down to a rise in imports, which grew by 1.7% and are a sign of robust domestic demand”.

She also argues that exports are coping with the strong pound:

“Contrary to expectations that the appreciation in sterling would lead to a reduction in the export of goods, there has been an increase of 0.6%. Indeed, when compared with the previous three months, export prices decreased by 0.8% for the three months ending in May.

The Bank of England was right to leave interest rate unchanged today, reckons Dr Gerard Lyons, economic advisor to London mayor Boris Johnson.

Updated

Greek borrowing costs rise after lacklustre auction

Investors are a little edgier about Greece today, after a much-anticipated bond sale drew modest demand.

The interest rate, or yield, on Greek 10-year bonds has jumped to 6.3%, from 6.1% last night. That’s quite a hefty move, but it still leaves yields away from the ‘danger zone’ of 7%.

The selloff was triggered by a Greek bond sale, which hasn’t proved as popular as its blockbuster auction three months ago.

And lacklustre demand means buyers were able to secure a more lucrative rate of return on the bonds.

Reuters and RANsquawk have more details:

Order books for the bond have topped 3 billion euros, according to IFR, a Thomson Reuters service. When Greece sold a five-year bond back in April orders reached over 20 billion euros.

Bailed-out Greece is aiming to raise up to 3 billion euros from the new bond, its second bond sale after it defaulted in 2012.

The Bank of England has also made no change to its quantitative easing programme, and there’s no accompanying statement.

Bank of England leaves interest rates unchanged

To no-one’s surprise, the Bank of England has left UK interest rates unchanged at 0.5%.

M&S finance officer quits to join Tesco

It’s official. M&S’s finance chief is off to Tesco.

Here’s the statement:

MARKS AND SPENCER GROUP PLC ANNOUNCES THE DEPARTURE OF ALAN STEWART

Marks and Spencer Group plc today announces the departure of Alan Stewart, Chief Finance Officer.

Alan has stepped down from Board and will leave M&S on a date and on terms to be agreed. The search for his successor is already underway.

And Tesco has announced that Stewart will receive a basic annual salary of £750,000 per year, plus replacement share awards worth £1.737m.

Those shares are being granted “in lieu of his deferred share awards from Marks & Spencer plc that will be forfeit when he joins Tesco”.

Those share awards are meant to tie senior executives to a company, by linking pay to long-term performance — that link is broken if you can simply get your new employer to offer the same terms….

Updated

Summary

Marks & Spencer’s troubles continue…. the word in the City is that Tesco has just poached M&S’s finance director, Alan Stewart.

• 11:18 – TESCO CLOSE TO NAMING MARKS & SPENCER CFO ALAN STEWART AS NEW FINANCE DIRECTOR – SOURCE FAMILIAR WITH THE SITUATION

At least he waited until after M&S’s AGM (on Tuesday)…

Updated

Britain’s widening trade deficit is a concern, says the British Chambers of Commerce (BCC).

Chief economist David Kern is worried that the progress made narrowing the deficit earlier this year has halted:

Today’s figures confirm that the pace of the UK’s rebalancing towards net exports is far too slow, and if this continues we risk missing out on the Prime Minister’s target of increasing exports to £1tn by 2020.

Therefore narrowing the trade deficit by providing additional support to UK exporters must remain a national priority for both the government and the MPC. On its part, the MPC must restore clarity to its forward guidance and resist calls for premature interest rate rises.

UK exports to the EU have fallen by 0.9% in the last three months (if you strip out erratic items), but are up by 4.6% to the rest of the world.

That’s via Christian Schulz, economist at Berenberg, who explains:

Trade growth has been more buoyant vis-à-vis the rest of the world than with Britain’s EU partners.

And is the strong pound hitting exporters? Schulz reckons not….

British exports are relatively price insensitive, sterling is still below pre-crisis levels vis-à-vis major trading partners’ currencies and global demand growth matters more than the exchange rate.

UK recovery remains a ‘domestic affair’

Britain’s widening trade gap illustrates how the UK’s recovery has been driven by the domestic economy, rather than strong global demand.

And with Europe’s economy still weak, it’s hard to see that changing quickly.

As Martin Beck, senior economic advisor to the EY ITEM Club, flags up:

“The shortfall of exports relative to imports is the largest since January. Exports picked up slightly in the month, while imports rose at their fastest pace for almost a year.

“Looking forward, we doubt that the export picture will brighten significantly, at least in the near-term. The recovery in the Eurozone economy, the UK’s largest single export market, is running at only a very modest pace.

And here’s another chart showing how Britain’s trade gap with Germany, the Netherlands and China widened in May:

The full data is online here.

Weaker European exports pushes UK trade gap wider, to £2.41bn in May

Britain’s trade gap with the rest of the world has swelled in May, as the UK was hit by weak demand from Europe.

Exports of goods to the European Union fell by 0.2% during the month, while exports of goods to countries outside the EU increased by 1.5%.

Exports to Germany and the Netherlands both fell during the month, as this chart shows:

The goods balance (physical exports minus imports) widened to -£9.2bn in May, from -£8.8bn in April. That’s a worse result than expected.

Total imports jumped 2% during the month, while exports rose by 1.1%.

The Office for National Statistics said this was partly due to an increase in imports of aircraft.

Britain’s traditional surplus in services was little changed at £6.78bn.

The total trade balance thus widened, to -£2.418bn, from -£2.05bn in April.

Despite the strong recovery, Britain has struggled to improve its trading position with the rest of the world, as this chart shows:

Imports have also outstripped exports over the last three months. The ONS reports:

In the three months ending May 2014, exports of goods increased by 0.1% to £72.6 billion and imports of goods increased by 0.5% to £98.9 billion….The export of goods excluding oil and erratics increased by 0.9% to £60.6 billion; reflecting a £0.4 billion increase in exports of cars.

Imports of goods excluding oil and erratics increased by 0.2% to £83.8 billion for the same period.

Italy and the Netherlands also suffer manufacturing declines in May

Wham! Two more European countries have reported that their industrial output fell in May, adding to worries about the European economy sparked by France this morning.

Italian industrial output slid by 1.2% during the month, the steepest monthly fall since November 2012. That’s much worse than expected — economists had predicted a rise of 0.2%.

That means that Italian industrial production is down by -0.4% over the last quarter, compared to the previous three months.

And over the last 12 months, Italian industrial production has decreased by 1.8% compared with May 2013.

A spokeswoman for national statistics institute ISTAT described the data as “very negative” (via Reuters).

The Dutch manufacturing sector also struggled in May, with output slumping by 1.9% during the month. It’s up just 0.5% over the last year, and the recent trend is downwards….

It’s a worrying echo of France’s troubles — as covered earlier this morning, French manufacturing output tumbled by 2.3% in May.

But everyone seems to have suffered – yesterday, we learned UK manufacturing output fell by 1.3%, while the German powerhouse suffered its biggest fall in two years, down 1.8%.

What went wrong in May? Can it really just be the May bank holidays?

More worrying signs for France — its annual inflation rate has dropped to just 0.6% (on a harmonised basis)

INSEE reported that food prices were down 1.4% year-on-year, and manufactured products down 1.2%, underlining the weakness of parts of the French economy. Inflation in the service sector, though, was up 1.8%.

Updated

In other corporate news, Mothercare’s interim CEO has been given the job fulltime.

Mark Newton-Jones, who was parachuted into the company in March, is quite a retail veteran — at just 25, he was a regional manager at Next covering 100+ stores, and he ran Shop Direct (including littlewoods.com), for nearly 10 years.

Newton-Jones will get a basic salary of £600,000 per year for running Mothercare, which has rejected a takeover approach from US rival Destination Maternity. That’s around £100k more than his predecessor.

Barratt boosted by housing demand

The upturn in Britain’s property sector has boosted housebuilder Barratt Developments. It posted a 8.6% jump in sales this morning, and have shareholders the welcome news that profits will hit the top end of expectations.

Burberry isn’t the only company fretting about the strong pound.

Associated British Foods (owner of Primark), has warned that sterling’s strength will have “a negative impact” on its sales and profits from overseas businesses, particularly in Grocery and Ingredients.

And that is on track to knock £50m of ABF’s profits, it suggests.

Burberry sales jump, but strong pound is a worry

Shares in UK fashion chain Burberry jumped 4% in early trading, despite warning that the strong pound is still eating into its profits.

Burberry is topping the FTSE 100 after reporting a 12% surge in comparable sales in the last three months.

That helped calm investors’ worries over the “increasing currency headwinds” which the company is suffering, due to the strong pound.

Burberry is on track to lose £10m in licensing revenue in Japan, and the impact on overall profits this year “will be material”, if rates remain at present levels.

Company boss Christopher Bailey (chief creative and chief executive officer), reckoned the sales jump:

…demonstrates our teams’ success in unlocking the benefits of these investments, as we continue to concentrate on the things we can control in an uncertain external environment.

Updated

French manufacturing output tumbled 2.3% in May

France’s economy has taken another blow – with manufacturing output slumping by an alarming 2.3% in May.

Statistics body INSEE said manufacturing output fell “dramatically” during the month.

The wider measure of industrial output also fell, by 1.7%, which will fuel concerns over the eurozone’s second largest economy.

The survey suggests France’s industrial sector struggled badly in May, with almost all industries reporting a drop in output.

Electrical and electronic equipment production fell by 4.9%, and transport manufacturing fell 3.5%.

And output in the manufacture of coke and refined petroleum products “plummeted” by 8.4%, INSEE reported.

So what happened?

French public holidays may have exacerbated the downturn. INSEE says three holidays fell on Thursdays, meaning firms may have shut down on the Friday too.

But as this graph shows, French manufacturing output has fallen by 0.9% over the last three months, as its economy struggles.

France isn’t alone, though. Recent data has shown that German and UK industrial output also fell in May, making some analysts wonder if the European economy hit trouble during the month….

Updated

Dovish Fed minutes supports markets

Good morning, and welcome to our rolling coverage of the financial markets, the economy, eurozone and business.

After a few shaky days, European stock markets are set for a calm open after the Federal Reserve showed last night that it’s in no rush to raise interest rates.

The minutes of the Fed’s last monetary policy meeting did show that its quantitative-easing programme is on track to end in October. So, less new money flowing into the markets.

Federal Reserve likely to end QE stimulus program in October

But that is tempered by signs that the Fed is too worried about America’s labour markets to start raising interest rates soon.

The minutes showed that many Fed policymakers are worried about the amount of spare capacity, or “slack”, in the economy.

Here’s the key line:

“A number of them thought [the spare capacity] was greater than measured by the official unemployment rate….citing, in particular, the still-high level of workers employed part time for economic reasons or the depressed labour force participation rate.”

Several Fed committee members also welcomed the prospect of US real wages rising, rather than fretting about the impact on inflation.

And that’s being taken as a sigh that the Fed’s still pretty dovish about economic prospects.

As Stan Shamu of IG explains:

The market seems to have been positioned for a hawkish shift in sentiment. In fact, the minutes showed the Fed continues to show concern about growth rather than inflation.

Which may be enough to stop the FTSE 100 falling for the fourth day running…

Here’s IG’s opening calls:

  • FTSE: 6720 +2
  • German DAX: 9816 +8
  • French CAC: 4362 +2
  • Spanish IBEX: 10765 +18
  • Italian MIB: 20900 +15

What else is afoot?

The Bank of England’s monetary policy committee ends its monthly meeting. It’s not expected to make any changes to interest rates or its asset purchase scheme (QE) though.

On the economic front, there’s the latest UK trade data (9.30am BST) and US weekly jobless numbers (1.30pm BST).

Plenty of corporate news around too — including another warning from Burberry that it’s suffering from the strong pound, and strong-looking numbers from housebuilder Barratt (of which more shortly….)

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